A Commute Too Far? Traffic, Critical Mass & The War for Talent

A number of different studies and trends indicate that while some things are equally if not more effective when conducted through the medium of the internet (for example, certain transactional activities that one might parcel-out to people all over the world to work on) many other activities, especially those that benefit from frequent formal and informal interactions, from the building of deep professional relationships and trust, and from subtle real-time dialogue, benefit from the close physical proximity and co-location found in large cities. People, organizations, and city-states all appear to gain economic, creative, and lifestyle benefits.

For example, a recent article in The Economist describes the economic advantages of larger cities over smaller ones:

Although America and the euro zone have similar total populations, America’s 50 largest metropolitan areas are home to 164m people, compared with just 102m in the euro area. This striking disparity has big consequences.

Differences in metropolitan populations may help explain gaps in productivity and incomes. Western Europe’s per-person GDP is 72% of America’s, on a purchasing-power-parity basis. A recent study by the McKinsey Global Institute, the consultancy’s research arm, reckons that some three-quarters of this gap can be chalked up to Europe’s relatively diminutive cities. More Americans than Europeans live in big cities: there is a particular divergence in the size of each region’s “middleweight” cities, those that teem just a little less than the likes of New York and Paris (see chart). And the premium earned by Americans in large cities relative to those in the countryside is larger than that earned by urban Europeans.

The advantage bestowed by large cities can be explained by their evolving economic role. In the industrial era, cities boomed because expensive transport made it attractive for firms to locate near coal deposits, waterways and each other. Isolated businesses could not match the cost savings from compact urban supply chains. The industrial heartlands in Europe and America sprang up for these reasons. Yet falling transport costs have made this centripetal force less important over the past half-century, leaving many industrial cities, like Detroit, in deep trouble.

Cities today have a productivity advantage for different reasons, to do with ideas rather than costs. When one firm in a city comes up with a new technique, product or design, nearby firms may quickly build on it or hire its creator. One firm’s innovation boosts its own productivity but also spills over to other businesses. Companies that prefer seclusion cut themselves off from these “knowledge spillovers”.

But the importance of spillovers seems to be increasing, even though the costs of communication are falling. Advanced information technology makes it easier for someone in San Francisco to speak to someone in Paris, but it also makes the ideas to be communicated more complex. Academic citations provide a simple way to track this evolution. A 2008 paper by Benjamin Jones of Northwestern University finds that it takes ever more people to produce new research, a trend he attributes to the increasing “burden of knowledge” associated with rising technological complexity and an expanding knowledge base.

Another study by Pierre Azoulay of the Massachusetts Institute of Technology, Joshua Graff Zivin of the University of California, San Diego, and Columbia University’s Bhaven Sampat also tracked academic work. The authors find that when a prominent researcher moves from one city to another, his peers in the origin city are less likely to cite his patents. Innovation today requires an ever-larger crowd of experts, preferably working in the same garage.

That makes more densely populated places more attractive to people who want to share knowledge. Technology innovators and entrepreneurs congregate in Silicon Valley, for instance, rather than in smaller places where they have less to offer to, or get from, would-be partners. And knowledge-sharing among such people tends to make cities more productive as they get bigger. In a 2009 paper Mr Glaeser and Matthew Resseger of Harvard University find that in highly skilled areas, city size explains 45% of the variation in worker productivity (it has almost no effect in underskilled cities). This connection between size, skills and productivity is not simply due to brainier workers choosing to live in more populous places. The cities themselves seem to promote learning. Mr Glaeser and Mr Resseger note that new arrivals to big cities do not receive the city’s wage premium all at once, but rather enjoy faster wage growth over time.

At the same time, the war for talent is forcing many organizations to re-think the location of their offices. In places like Toronto the time and frustration of driving from one part of the city to another is growing. At the same time, many cities such as Chicago, Toronto and many others have a growing number of residential developments — condos, townhouses — that often appeal to the kind of knowledge workers many companies need.

As Tara Perkins noted in her piece in the Globe and Mail:

Jason Johnstone feels like a new man since he switched workplaces this spring. It wasn’t the job that was killing him so much as the lifestyle.

Until May, he’d been living downtown and commuting to work in Mississauga. It used to be commonplace for businesses to take advantage of low rents in the suburbs; employees would pay the price in long travel times. But when SNC Lavalin offered Mr. Johnstone a new job, he was pleasantly surprised to find his new workplace would be located downtown.

SNC Lavalin is not alone. Companies are increasingly sucking up higher rents for more central locations, where they can draw from the pool of young, highly educated workers moving into newly built condos that are sprouting up in the city centre.

The demographic is expected to grow as Toronto’s downtown intensifies and planners concentrate on creating “live, play, work” communities. As Mr. Johnstone, 30, makes clear, the offer of a centralized life is a huge draw for some employees. “It’s turned my commute from about an hour’s drive to a 30-minute walk,” Mr. Johnstone says. “I sold my car after I got this job. I decided to walk, I lost weight, I felt like my lifestyle got better. I’m saving money, and can spend my disposable income in other areas.”

The benefit to the company, meanwhile, apparently offsets the higher cost of rent.

Availability rates for downtown office space now sit at 4.3 per cent, down from 5 per cent a year ago. In contrast, more office space sits empty in suburban areas than a year ago, with availability rates rising from 8.2 per cent to 8.9 per cent, according to Cushman & Wakefield, a commercial-real-estate firm.

The condo boom that has characterized the city for the last decade, and has really been going full-throttle for about six years, slightly preceded the movement of offices to the core that has been occurring in the last few years. Companies that have been taking up more office space downtown of late range from Coca-Cola to Google to Deloitte.

Mr. Johnstone’s employer, SNC Lavalin, had an office in Etobicoke but needed space to house employees who were working on projects for the mining industry. It surveyed its employees and found that 73 per cent lived either in the downtown core or within five kilometres of a GO train station. SNC Lavalin transferred 280 employees downtown in late 2011, and has hired 120, including Mr. Johnstone, since then.

“The reason you see corporations going downtown is because they need the talent, and they want the best talent,” says Joe Brancato, a regional managing principal with Gensler, a global architectural and planning firm, who is based in New York.

Companies must pay up for the opportunity to be downtown. Gross occupancy costs for space in the financial core are roughly $65 per square foot per year. In the new buildings south of Front Street they would be about $55, and in northwest Mississauga they would be about $33, according to Michael Caplice, senior managing director of office leasing at Cushman & Wakefield.

“These young well-educated professionals, that talent is a dangling carrot for employers,” he said. “Every major user we talk to raises it. It’s part of the war for talent. The work force that these employers want lives down here and isn’t interested in the commute.”

Eric Ginsburg, who helps oversee the Toronto office of Gensler, used to live car-less in New York and now sees the trend rising in Toronto. “As a New Yorker I experienced that lifestyle and coming here a lot of people I talk to have gotten rid of their car within the past five years.”

He adds that the trend has picked up as commute times have worsened. “The big thing we hear with the traffic is the unpredictability of it,” he says. “If you’re in New York you can somewhat predict, coming into the city, the times that you should avoid. But here it’s unexplained, you can have traffic jams at 2 p.m.”

Deloitte will be moving up to 1,000 of its employees from the suburbs to new office premises it will be taking up at the Bay Adelaide Centre East, which is under construction in the financial district. Being close to clients is a key benefit to the location, as are the nearby amenities such as restaurants and stores, says Sheila Botting, national leader at Deloitte Real Estate.

Industry experts say that the company that kicked off the trend was Telus, which moved into the new tower at 25 York St. that was completed in 2009. Peter Menkes, president of the industrial and commercial division at Menkes Developments, which developed that building, says part of what’s at play is the province’s bid to curb urban sprawl.

In the 1980s a migration was occurring to the suburbs, with many companies leaving downtown. “That was all part of urban sprawl, as people were moving to the suburbs and wanted to be closer to where they worked,” Mr. Menkes says. “Downtown Toronto really hadn’t seen much new office development from the early 1990s right through until 2009. There was about an 18-year period where there weren’t any new office buildings completed.”

But the province’s decision to create a buffer zone around urban sprawl caused planners and developers to turn their sights back towards downtown intensification. That strategy is now really taking off with the growth of mixed-use projects that combine some elements of retail, office and residential space, as well as the new projects that are pushing into areas such as the southern pocket of the core.

Google will be officially unveiling its new office at Richmond and York next week, and employees have been working there for the past couple of weeks. The company already had a downtown location, but decided to move its roughly 150 employees to the new larger premises so that it can do more hiring.

Dave Brown, who works in the TV and film content space at Google, has been relishing the downtown lifestyle that he’s had since taking the role in March. Previous jobs and homes had him commuting from Mississauga to Scarborough, and from Toronto to Waterloo.

“Now, whether I’m on my bike or on the streetcar, I’m able to see people on the way home and stop in and run errands on my way home,” he says. “You’re getting things done on your way home as opposed to having an hour and a half of captivity before you can actually start your life again.”

There is another advantage to having people and organizations clustered in urban areas: not only is there increased potential for cross-pollination across organizations (including schools and government) but changing jobs becomes a bit easier than if one employer is in an eastern suburb and another potential one is in a western suburb. Or the other logistical nightmare of having one partner’s employer on one side of a city and the other partner with a job on the other side. A critical mass of talent and employers means portability of careers and the little chores of life are facilitated.